Nvidia has reportedly ordered its component suppliers to halt production of its H20 AI chips, which are designed specifically for the Chinese market. The directive, reported Friday, follows a crackdown from Beijing, which has urged local tech giants to stop buying the chips due to national security fears.
Chinese regulators are investigating the H20 for potential “backdoors,” a claim Nvidia’s CEO Jensen Huang publicly denies. The production halt marks the latest major setback for the U.S. chipmaker in China, complicating a volatile relationship just weeks after the U.S. government controversially approved the resumption of H20 sales.
The sudden move throws Nvidia’s China strategy into disarray and could impact its financial outlook. In a brief statement, the company said only, “We constantly manage our supply chain to address market conditions.” The directive was reportedly sent to key partners including Amkor Technology, Samsung, and Foxconn.
A High-Stakes Reversal Meets a New Wall
This unraveling comes just over a month after Washington executed a stunning policy reversal that temporarily reopened the lucrative Chinese market. On July 15, the Trump administration gave Nvidia the green light to resume H20 sales, ending a costly ban imposed on April 15. That restriction had forced Nvidia to take a staggering $4.5 billion writedown on unsold inventory and cost it an estimated $2.5 billion in sales in the last financial quarter alone.
The White House framed the reversal as a pragmatic, if reactive, strategy to contain Chinese tech giant Huawei. The April ban had inadvertently created a hardware vacuum, fueling the rise of Huawei’s own Ascend AI accelerators. As industry experts had warned, Chinese companies were simply switching to the domestic alternative. White House AI Czar David Sacks explained the new logic, stating, “we’re not selling our latest greatest chips to China, but we can deprive Huawei of basically having this giant market share in China.”
However, the policy came with a highly unusual condition: an unprecedented deal requiring Nvidia and AMD to pay the U.S. government 15% of all revenue from their China AI chip sales. President Donald Trump confirmed he personally negotiated the terms directly with Nvidia CEO Jensen Huang, stating, “I said, ‘Listen, I want 20 percent if I’m going to approve this for you, for the country.’ And he [Huang] said, ‘Would you make it 15?’” The arrangement, which also applied to AMD’s MI308 chips, effectively made the U.S. government a direct stakeholder in the chipmakers’ success in a rival nation.
Beijing’s ‘Backdoor’ Fears
Just as Nvidia prepared to restart sales, Beijing threw up its own formidable roadblock. On July 31, China’s Cyberspace Administration (CAC) launched a security probe into the H20 chips, summoning the company to a meeting. The investigation centers on fears that the chips could contain hidden tracking technology, potential backdoors, or remote kill switches, which Beijing considers a significant national security threat.
These concerns are a direct response to proposed U.S. legislation. The bipartisan U.S. Chip Security Act, introduced in May by lawmakers including Senator Tom Cotton, would legally mandate that semiconductor companies include such security and location-verification features to prevent chips from being diverted for unauthorized military use. The CAC demanded an explanation from Nvidia for what it termed “serious security vulnerabilities.”
Nvidia issued a forceful and detailed public denial on its company blog, arguing that intentionally building vulnerabilities is antithetical to security. The company declared, “there are no back doors in NVIDIA chips. No kill switches. No spyware. That’s not how trustworthy systems are built — and never will be.” The post compared the idea to the failed 1990s Clipper Chip initiative, a government-led project that was a policy and technical failure. Speaking to reporters in Taiwan on Friday, CEO Jensen Huang reiterated this stance, acknowledging he was “surprised” by the queries and adding, “hopefully the response that we’ve given to the Chinese government will be sufficient. We’re in discussions with them.”
The Geopolitical Chessboard
The geopolitical situation has been further inflamed by pointed and arguably undiplomatic remarks from U.S. officials. In a July interview, Commerce Secretary Howard Lutnick commented that China was not getting America’s best technology. “We don’t sell them our best stuff, not our second best stuff, not even our third best. The fourth one down, we want to keep China using it,” he told CNBC. This statement was reportedly perceived as “insulting” by Chinese regulators, prompting a coordinated pushback from multiple agencies to promote homegrown alternatives.
Following these remarks and the launch of the security probe, Beijing reportedly sent informal notices to its largest tech firms, including ByteDance, Alibaba, and Tencent, urging them to halt H20 orders altogether until the national security review was complete. This pressure campaign, described as a “soft mandate,” appears to be a key driver behind Nvidia’s eventual decision to suspend production, as its primary customers were effectively barred from purchasing the chips.
The entire episode highlights Nvidia’s precarious position as a pawn in a much larger geopolitical chess match. The company must prove its chips are secure to Beijing, but not so capable as to alarm Washington. U.S. officials have openly linked the chip policy to other strategic negotiations, with Secretary Lutnick admitting the H20 reversal was part of a broader trade deal involving rare earth minerals.
This entanglement means Nvidia’s business decisions are subject to complex international bargaining. CEO Jensen Huang acknowledged his own diplomatic efforts, explaining his discussions with President Trump on the matter. “AI is going to advance around the world, with or without the United States, and it is important for us to maximize our AI export technology,” he explained, framing it as vital for maintaining the dominance of the “American AI tech stack.”
Market Tremors and the Push for Self-Sufficiency
The production halt is already sending ripples through the market. Analysts warn of a weaker third-quarter outlook for Nvidia, given the uncertainty in a market that was expected to generate billions in revenue. Conversely, Chinese domestic chip stocks rallied on the news.
This reinforces Beijing’s long-term goal of technological self-sufficiency. The U.S. trade war and unpredictable policy shifts have only accelerated China’s drive to cultivate domestic champions like Huawei. Some analysts believe China’s leverage is growing.
According to Gavekal Dragonomics analyst Tilly Zhang, “Nvidia chips are now dispensable for China. They can be easily put on the negotiating table.” However, others argue that China still lacks a viable high-end alternative to Nvidia’s hardware for advanced research. Analyst Charlie Chai of 86Research believes Beijing is unlikely to drive Nvidia out completely, “we do not believe Beijing will make excessively harsh demands or introduce regulatory hurdles that will effectively drive Nvidia out of China – for the lack of alternatives.”